Insurance Companies Slam Plan to Double Death Reparations

by FINANCIAL CORRESPONDENT in Tehran

[ business ] Insurance companies in Iran earn half of their total annual revenue of 4.5 trillion tomans from third-party liability coverage premiums. According to insurance companies, the government's decision to double death reparation payments, literally "blood price" in Farsi, would devour the entire 2.25 trillion and leave nothing to pay for property damage, hospitalization, medical costs, and other required compensation.

Iran has one of the highest annual per capita traffic-related fatality rates in the world, over 31 per 100,000 people. That amounts to more than 25,000 deaths, almost 69 per day.

Because of the new rule, insurance companies will have to increase annual premiums on the third-party element of auto insurance from an average of around 250,000 tomans to about 500,000 (from $200 to $400). In other words, a family with two cars would have to pay one million tomans annually for auto insurance alone, which equals six months of direct government financial assistance for an average family of four.

There are an estimated 12-14 million liability insurance contracts in Iran. Some observers believe that given the dire state of the economy, many people will have no choice but to forgo insuring their cars altogether and deal with the possible consequences. Iranians who rely on their own motor vehicles to make a living are panic-stricken at the prospect of not being able to afford the new rates and having to paying 90-120 million tomans in reparations in the event of a fatal accident.

In the view of some experts, insurance companies are making too much profit and paying out 90-120 million tomans for each third-party death is not a backbreaker for them, while others believe the government will ultimately be compelled to subsidize the insurance industry. A simple analysis shows that after paying death reparations at the new rate, medical costs and compensation to the annual average of 300,000 injured, and property damages, there will be no profit at all. Those in the know insist that unless insurance companies are permitted to raise insurance premiums, they will more than likely exploit every technicality to avoid paying damages.

Judiciary spokesman Gholam Hossein Mohseni Ejei recently remarked that the judiciary, in conjunction with the Agricultural Jihad Ministry, conducted field research on the issue and determined that death reparations should be equivalent to the market price of 100 camels -- 90 million tomans ($75,000). He added that as the increase in death reparations will require higher insurance premiums, government officials have discussed providing subsidies to the Central Insurance Co. to prevent further financial pressure on the public.

The question then is, Will the government be able to pay a death reparation subsidy?

It appears that if this law goes into effect, it will result in sharp increases in premiums. In the face of retargeted subsidies and double-digit hikes in the rate of inflation, many households will not be able to afford the new rates. If a tragedy occurs, those who are uninsured must either sell their houses and valuables to pay the mandated death reparations, or face prison sentences.

The head of the Central Insurance Co. suggested that a large number of people will spend two or three years in prison in lieu of the $3,300 additional annual premium for full death reparation coverage. Last year, 2,500 of those who could not afford to pay the balance of death reparations after what their partial coverage had paid were released from jail. Today, only about 100 such people remain imprisoned. The hike will certainly lead many new people to be incarcerated.

Insurance industry observers believe that the additional 30 million toman death reparation surcharge during the forbidden months on top of the general 90 million toman level can't be met by the industry. [During the four so-called forbidden months of the Islamic calendar -- Muharram, Rajab, Dhu al-Qi'dah, and Dhu al-Hijjah -- all aggression is forbidden.] They argue that it would have been better to phase in the hike.

Mr. Farshbaaf, head of the Central Insurance Co., expressed his astonishment at the doubling of death reparations. "This will lead to a flood of new prisoners. Coming at the time of the government's retargeting of subsidies and price controls, the death reparation increase will have negative consequences," he said.

Farshbaaf also said that the astronomical increase has been a shock to the insurance industry and that it should not have been officially submitted by the Justice Ministry, which should now review it. If not, the insurance companies will face an exceptional challenge.

Gholam Reza Mesbahi Moghadam, a member of the Majles's Economics Commission, also described the 100 percent increase in base death reparations as a shock to the industry.

Ali Shaebaani, head of Iran Insurance Co.'s auto coverage division, said that doubling the premiums will result in the number of policies dropping by over half as people will not be able to afford to purchase additional insurance to cover the greater liability.

As things stand, Iranians can't even pay the current premiums. If death reparations are in fact doubled, many people will take to the roads without coverage, which will likely have other dire consequences: Many of those without coverage will probably choose to flee accident scenes. The number of court cases and prisoners will balloon. Drivers without proper coverage will be under more stress, which in turn will increases the odds of accidents and thus further cheating and evasions.

In fact, statistics show that most drivers involved in accidents on Iran's roads are those with insufficient insurance coverage. Any increase in insurance premiums will add to the number of such drivers.

Obviously, we will see a jump in premiums for the third-party section of policies. How are people going to afford such increases?

For example, a bus driver must pay about 2.5 million tomans ($2,100) annually for third-party coverage alone. Perhaps if insurance companies used actuarial tables to assess risks of different drivers, there would be fairer premiums for low-risk drivers and more careful driving. The question arises: Why should city drivers pay high premiums when most accidents occur on country roads and highways used predominantly by others, especially commercial drivers?

Meanwhile, insurers are facing serious uncertainties. Overshadowing the review of current death reparation cases, privately or in courts, is the likelihood that the new law will be applied retroactively. Because of the long delays in judicial review of death reparation cases, as many as 50,000 such cases may be subject to the new reparation levels. Another problem is that history shows that when a new law is implemented, only 10 percent of the insured comply and obtain additional coverage. In other words, 90 percent of drivers will be entering traffic without proper liability coverage. What department will bear the consequential heavy load of new litigation?

Gholam Reza Tajgardoon, chairman of the Insurers' Union of Iran, wrote the head of the judiciary to declare that "around 15 million insured have been brought under coverage through national education about insurance by diligent efforts of associated institutions, and today, no one is allowed to use the roads without third-party liability coverage. In recent years this has led to better protection and certain reduction in incarceration rates and brought further peace of mind and personal assurance to the citizenry. But the news of raising the mandated death reparation tariff to 90 million tomans has dealt a blow to the insurance industry which in the view of experts will place it in an undesirable situation from which it can not extricate itself for years."

In the view of Tajgardoon and like-minded observers, with the sharp rise in the mandated death reparation tariff, fraud and evasion will grow in direct contradiction to the wishes and mandate of the judiciary system. Neither the judiciary nor the insurance industry will have the capability to manage this effect. The insurance industry will be forced to use shareholders assets' and the premiums of innocent clients to pay for increased expenses rising from fraud and deception. Given that the judiciary's mandate is to prevent unethical and non-Islamic behavior, the consequences will be perverse indeed.

As the law will be applied to all pending cases, current offenders and their insurance companies awaiting judgment will eventually face an additional 1,000 trillion tomans ($830 billion) in liability. Certainly this will lead to the bankruptcy of many insurance companies. To prove the point, this amount is in fact larger than the total capital of the whole insurance industry -- including reinsurers -- in Iran. Furthermore, the privatization of three major insurance companies over the last three years has made tens of thousands of Iranians their shareholders. They will also face a ruinous shock.

Within the industry, it is believed that enactment of the bill will be a major deterrent to investment in the field. And, as third-party liability coverage premium is perceived as a nonessential expense, many people's reaction to its sudden dramatic rise will be to drop all coverage or to continue with policies that already leave them underinsured, further reducing the insurance industry's revenue. Many in the industry are reduced to holding out hope that something will prevent the official implementation of the bill.

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